AbstractThis study was conducted to investigate the level of underemployment in agricultural sector of Peshawar Valley. Underemployment is a situation wherein the number of hours worked of an employed person is not enough compared to what he is willing and able to engage in. The study is based on data collected through structured questionnaire from three hundred sampled farmers using multi stage stratified random sampling technique. Respondents were categorized into six groups on the basis of size of land holdings. In the study area, agriculture is the major source of employment. Three types of labour---family labour, casual hired labour and permanent hired labour, were found engaged in the farming activities. The average size of land holdings was 2.72 hectares ranging from 0.20 to 12.14. About 50% of farmers had their land holdings below 2 hectares. On an average, 2.46 adult units of family labour were engaged in agricultural activities ranging from 1.61 to 3.54. The results of the study revealed that average level of underemployment was 22.95%. The major determinants of underemployment were farm size, size of family labour, size of livestock herd, level of off-farm employment, level of education and distance of the village from the main road. Econometric analysis revealed that coefficients of the farm size, size of livestock herd, level of off-farm employment and level of education were negatively correlated and significant while coefficients of size of family labour and distance of the village from main road were positively correlated. There was significant difference in the level of underemployment among various size of farms. Some of small farmers find it difficult to eke out their livelihood solely from agriculture. They are switching to other sources of income. About 25.33% of sampled farmers were engaged in off-farm employments. Negative correlation was found between farm size and level of off-farm employment. Other major factors affecting off-farm employment were household size, size of livestock herd, level of education, village distance from main road and age of sampled respondents. The analysis shows that coefficients of farm size, size of livestock herd and village distance from main road were negatively correlated while coefficients or household size, level of education and age of sampled respondents were positively correlated with the level of off-farm employment. Size of land holdings decreases as a result of subdivision due to law of inheritance. In addition to this, technological change continues to exert a significant long run influence on farm sector employment and it is likely that, this long-term trend will continue. The result is a decline in the demand for labour in farming. As a result, underemployment in the agricultural sector is likely to increase in future. Off-farm employment has the potential to absorb excess labour from agricultural sector. So, there is need to create off-farm employment opportunities. In rural areas, livestock provides a secondary income for households. This sector may indicate scope for development. There is need to develop livestock sector through various measures. Agro-processing industries are limited in the study area. It is recommended to look towards processing activities and value added products in the field of agriculture. Agricultural marketing system needs to be improved through expanding network of farm to market roads and storage facilities. It is also recommended to open skill development centers in rural areas to impart training and skills in various needed profession.